A Project Report On A STUDY ON INVESTORS PREFERENCE TOWARDS SELECTED OPTIONS STRATEGIES

Presented By: ANKITA DARJI Enroll. No. 097200592033 TRUSHNA PATEL Enroll. No. 097200592051

Flow of presentation
Introduction of options & futures market Types of option strategies Research methodology Analysis Findings & suggestions Conclusion bibliography

Introduction of options &futures market

Definition:
Infinanceanoption strategyis the purchase and/or sale of one or various option positions and possibly an underlying position. apremiumto the option seller, the right to buy or sell afinancial instrumentorcommodityduring a given period. Option trading is used in the futures andsharemarketsand a significant volume of option trading takes place over-the-counter (OTC), i.e., not on an exchange.

Meaning: Acontractwhich gives the holder, inreturnfor paying

Meaning of futures contract : A futures contract is a

standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today (the futures price or the strike price) but with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange. The party agreeing to buy the underlying asset in the future, the "buyer" of the contract, is said to be "long", and the party agreeing to sell the asset in the future, the "seller" of the contract, is said to be "short".

Types of option strategies

Long call Risk: Limited Reward: Unlimited The Trade: Buy and out of the money call option

Long put

Risk: Limited Reward: Limited to the initial cost of the Put option. The Trade: Buy a Put. The more bearish your view the further out of the money you should go.

Naked Call

Risk: Unlimited Reward: Limited The Trade: Sell a Call short. Selling naked calls is a risky strategy and should therefore be utilized with caution and in conjunction alongside a solid plan for reducing risk should the market move against the trade.

Naked Put

Risk: Limited because the stock cannot trade below zero, but the risk can still be massive because of the inherent leverage involved. Reward: Limited The Trade: An at the money or out of the money Put is sold short.

Covered Call

Risk: Limited Reward: Limited The Trade: Buy shares short (usually) an out of the money Call option

Call Spread

Risk: Limited Reward: Limited The Trade: Buy a call and sell short a call with a higher strike

Put Spread

Risk: Limited Reward: Limited The Trade: Buy an at the money put option and sell an out of the money put. The profit will come as the share price drops.

Long Strangle

Risk: Limited Reward: Unlimited The Trade: Buying out-of-themoney calls and put.

Short strangle

Risk: Limited Reward: Limited The Trade: Sell out of the money calls and puts.

Long Straddle

Risk: Limited, but this is not a low-risk strategy because aStraddle is normally expensive to buy and both options are wasting assets. Reward: Unlimited The Trade: An at the money or near money call and put option are bought with the same strike price.

Short Straddle

Risk: Unlimited Reward: Limited The Trade: Both an at the money call and put are sold short

Bull Put Spread

Risk: Limited Reward: Limited The Trade: Sell an out-of-themoney put and buy an even further out of the money put. Since a put with a higher strike price is sold, the trade is initiated for a credit 9

Call Ratio Spread

Risk: Limited Reward: Unlimited The Trade: The trade itself involves selling a call (normally at the money or near to the money) at a lower strike and buying a greater number of calls at a higher strike price. Depending on the strikes chosen, the position can be established for free or at a small cost. Risk: Limited Reward: Limited The Trade: Sell a call short and simultaneously purchase a call with a higher strike price.

Bear Call Spread

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Objective for project

To know about option strategy. Forward and future contract do not give call and put option for trading so we want to measure that views. To distinguish different strategies offered by broker. To know about view of people regarding Option strategy. To see why Option strategy is not success in todays market. To study about the different investment option in which public want to invest. To know the purpose of investing in option. To distinguish about the prefer duration in Option strategy. To know about investor experience in stock market. To recognize how much amount people want to invest in option. To analyze the primary objective for investing.

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Research methodology
Primary data collection
Research Design: Descriptive Sampling Technique: Random Sampling Sample Unit: stock market investors Sample Size: 35 Customers Tool For Primary Data Collection: Questionnaire

Secondary Data Collection

Published material of different companies News paper website

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Analysis
Gender Male Female 27 8 77% 23%

Occupation Business Service professiona l Housewife retired 8 18 9 0 0 23% 51% 26% 0% 0% 13

Age

18-25 26-40 41-55 56-65 65 above

18 11 6 0 0

51% 31% 17% 0% 0%

Personal annual income (in Rs.)

100001 to 500000 500001 to 10000000 10000001 and above 28 4 3 80% 11% 9%

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In Which Investment Options Do You Invest? Asset management Mutual fund Bonds Bank Fixed Deposit Equity share & stocks Real Estate Gold/Silver Commodity 3 13 7 19 25 15 20 2 9% 37% 20% 54% 71% 43% 57% 6% 15

In Which Option Would You Like To Invest Or You Have Invested? Long call 25 71% Short call Long put Short Put Bear Call Spread Bear Put Spread Covered Call Long Strangle Short Strangle Long straddle Short Straddle Call Ratio Spread Call Spread 5 7 2 3 2 10 10 1 5 2 8 3 14% 20% 6% 9% 6% 29% 29% 3% 14% 6% 23% 9% 16

What Is The Purpose Of Investing In Options?

Diversified investment Secured Return Saving Purpose Reducing risk Tax Planning Safety Retirement Benefit

16 11 15 11 9 12 9

46% 31% 43% 31% 26% 34% 26%

What You Preferred Duration For Investment In Option Trading?

0 to 1 month 1 to 2 month 2 to 4 month 4 to 6 month

5 12 11 7

14% 34% 31% 20% 17

How Much Experience Do You Have In Investing In Stock Market?

None 1 to 3 year 3 to 5 year Over 5 years

11 7 6 11

31% 20% 17% 31%

How Long Do You Prefer To Invest In The Stock Market?

Short term Long term

15 20

43% 57% 18

In Case You Develop Interest In Option, What Amount Would You Like To Invest? Less than 10000 10001 to 30000 30001 to 50000 50001 and above

11 12 7 5

31% 34% 20% 14%

What Is Your Primary Objective For Investment? Safety of fund Current income Growth & income Conservation Growth Aggressive Growth 11 3 29 4 8 31% 9% 83% 11% 23% 19

Through Which Source You Are Planning To Invest? Self-knowledge Relatives & friends Experts tips Company perception E-mail & websites Expected Annual Rate Of Return? Less than 10% 11% to 20% 21% & above 1 28 6 3% 80% 17% 20 27 7 16 9 8 77% 20% 46% 26% 23%

How Do You Rate Your Willingness To Take Financial Risk?

Very low Below average Average Above Average Very High

4 1 23 5 2

11% 3% 66% 14% 6%

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Relationship between Gender and duration.

nvestment Duration (in month) to 1 ender ale to 2 to 4 to 6 otal 6

Since it is 2 * 4 table, the emale degree of freedom (d.f.) would be (2-1)*(4-1) =3 So, tabulated value is 7.8147 OTAL 2 1 5 2
Expected frequency =

Expected Actual Frequency Table Value Value Expected Frequency Value

)
to 6 .2

xpected Table to 1 ender F0 3 8 8 7 2 4 3 0 ale emale .71 .28

nvestment Duration (in month) to 2 .9 to 4 .17 .83 e 0.008 0.091 0.004 0.62 0.41 0.27 0.01 1.8 3.213

Fe .08 3.71 8.9 8.17 5.2 1.28 3.08 2.83 1.8 Total of Expected Frequency:-

.8

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Calculated value is less than chi-square table value so null hypothesis is accepted so there is relation between Gender and duration.

elationship between Expected return Income

xpected return(in %) ess than 10 ersonal income 00001 to 500000 1 to 20 1 bove 20 otal 6

00001 to 1000000 Since it is 3 * 3 tables, the degree of freedom (d.f.) would be (3-1)*(3-1) =4 So, 2 tabulated value is 9.4877

Expected bove 1000000Expected = Actual frequency Frequency Table OTAL Value 7 Value Expected Frequency Value

xpected Table

xpected return (in %) ess than 10 1 to 20 0 e 0.09 .54 0.05 0.11 0.2 0.03 0.26 0.06 0.19 1.5 2.49 .4 bove 20 .2 .4 .4

ersonal income F0 1 21 4 0 5 2 0 1 1

00001 to 500000

.74

00001 to 1000000 .2 Fe 074 bove 1000000 .06 20 5.2 0.2 5.4 1.4 0.06 1.54 0.4 Total of Expected Frequency :-

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Calculated value is less than chi-square table value so null hypothesis is accepted so there is relation between Expected return and Personal Income.

Relationship between Investment horizon and Experience nvestment Horizon

ong term xperience one to 3 to 5 Since it is 2 * 4 tables, the degree of freedom (d.f.) would be (2-1)*(4-1) =3 So, tabulated value is 7.8147 and above 0 2 1 hort term otal 1

Expected OTAL = frequency

Expected Actual 0 5 Frequency Table Value Value Expected Frequency Value

xpected Table

nvestment Horizon ong term hort term .71 e 0.83 .57 1.11 .71 0 0 0.6 0.8 2.19 2.92 8.45

xperience F0 4 7 4 3 2 4 10 1

one to 3

.28

Fe to 5 6.28 .43 4.71 and above .29 4 3 3.43 2.57 6.29 4.71 Total of Expected Frequency:-

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Calculated value is less than chi-square table value so null hypothesis is accepted so there is relation between Investment horizon and Experience.

Major findings
People are aware of the option strategy and their different parameters. People like to invest for secured return, saving and safety purpose. Option strategy is more risky and unsecured. so people dont want to invest in option strategy. People are investing their money by their self-knowledge of investment. people expected annual return is 11% to 20%. And option strategies do not provide more return than principle amount of the investors. People have knowledge about investment pattern. Maximum people have experience around above 5 years for investment in stock market. Mostly Option strategy provides maximum return in long-term investment with more risk. And people are moderate risk taking. Thus option strategy failed in the market. People dont want to take any kind of risk for their investment and option strategies have higher risk investment for their investors.

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Suggestion
Option strategy brokers should give better return in long-term period. Because people like to invest for good return and long-term period. Option strategy should collect small amount of investment so middle level income group can also invest in that companies. Another reason is people want to invest up to 30000 in option strategy as per our research. Option strategy should invest in secured return sectors. So people can get lower risk income. Option strategy brokers should invest in different strategies which incur profit. So that the broker will be able to give well return and benefits to their customers. Option strategy should not give any assurance like return principle amount, growth rate etc. because they are under pressure to achieve their assurance.

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Conclusion
After doing analysis it showed that 76% people are aware about the option strategy and only 24% people are not aware of option strategy. So we can say that people are aware about various strategies but they dont want to invest in options. There are some reasons for why people dont want to invest in options strategies. They are given below: Option strategy is for long-term investment planning. People are concern more about the return. Option strategy does not give maximum return so investors do not like to invest in option strategy. People dont trust option strategy because most of the people invest by their selfknowledge. People dont want to invest in risky sectors. And option strategy brokers invest in equity sector for better returns. So investors do not prefer option strategy. Thus we conclude that if option strategies brokers provide some extra benefits to consumers than people can be attracted for invest in option strategy.

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Bibliography
Web sites http://www.buzzle.com http://www.businessdictionary.com http://www.squidoo.com http://www.thinktrade.net/options-advantages-and-disadvantages.php http://www.learnmoney.co.uk http://www.ihmctan.edu/PDF/notes/Research_Methodology.pdf http://www.newagepublishers.com/samplechapter/000896.pdf http://www.business-standard.com http://articles.economictimes.indiatimes.com http://wikipidia.com

Books Future and Option Market by John C. Hull Derivatives and Risk management by Rajiv Srivastava Business Statistic by Ken Black

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A Study On Investors Preference Towards Selected Option Strategies

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